Bankruptcy update, Britain plus California
Posted by seumasach on November 30, 2008
Ambrose evans-Pritchard
25th November, 2008
The CDS spreads on British debt jumped even higher on Tuesday, touching 100 at one stage. This is a little frightening.
I suspect it reflects fear that the liabilities of the British-based banks — which include HSBC and Standard Chartered, with all their global exposure, as well as RBS, Barclays, Lloyds TSB, HBOS, and Northern Rock — are disturbingly large for the size of the UK economy.
Britain has no real debt in foreign currencies. Like other AAA states, it borrows in its own currency. This is a lifesaver.
However, and here is the awful catch, some of these private banks have vast dollar positions, so as more of them fall into the hands of the British state (partially or fully) the dollar debt implicitly moves across onto the sovereign balance sheet.
This is not a subject that I have seen discussed anywhere, but it is worth pondering. What killed Iceland was the dollar/euro debts of its three big banks, not its own sovereign debt in Krona. It is the dollar liabilities of Russia’s banks and companies that is now causing a run on the rouble.
Here lies the real danger of taking over all these banks so nonchalantly.
I suspect that some hedge funds have already spotted this Achilles Heel and are now testing the trade.
(Although a US hedge fund told me last weekend he was targeting the default risk in five other countries in Europe — and the EIB — but not British debt because he thought that the UK’s role as a military power and a permanent UN Security Council member provided an extra shield, ie the global order has too much political investment in Britain to let it happen. I have no idea whether this is a good judgement, but I pass it on)
By the way, my colleague Yvette Essen showed me the CDS data on some of the US states. These are quite revealing too.
Michigan 192
California 165
Nevada 164
New Jersey 150
Ohio 104
So, California is now priced as a greater bankruptcy risk than Slovakia 150.
In These New Times 
inthesenewtimes said
“This is not a subject that I have seen discussed anywhere, but it is worth pondering.’
The question of dollar positions is discussed by Willem Buiter:
inthesenewtimes.com/2008/…
sterling-crisis-or-are-we-in-one-already/
I’m glad someone at last has raised the geopolitical aspect of this situation:
“the UK’s role as a military power and a permanent UN Security Council member provided an extra shield, ie the global order has too much political investment in Britain to let it happen’
Had the Iraq war been a success it would have strengthened the financial position of the US and the UK. But it has not been a success; nor has the Afghan war. The result is a negative effect on the pound/ dollar since other countries are looking around for alternative global leadership. The situation of the UK economy is, therefore, much worse than the statistics make out as I have argued for some time;
http://www.endofempire.org/oped_...
http://www.endofempire.org/oped_...
In addition China, for example, no longer has any motive to buy into UK government debt as opposed to US government debt:
inthesenewtimes.com/2008/…
The markets are likely then to drive the pound down to a level at which they think it might enter the Euro. It would be as well to begin negotiating this now rather than wait until the markets force it upon us.